Build vs. Buy: Which Is Best for Your First Rental?

0:00Henry Washington:Would you ever buy a house built in the early 1900s? If you answered no, you might be overlooking the best deals in your market. In some areas of the country, most houses are old, especially the affordable ones investors target. So if your buy box starts in the 1960s, you're filtering out a huge chunk of inventory, including some potential home runs. Old houses do require a different playbook. Some repairs are surprisingly cheap, like new electrical might run you only five grand. But foundation issues or bad plumbing could turn your promising new rental properties into a long term money pit. The key is spotting those differences before you close.

0:41Henry Washington:So today we're breaking it down. How to spot the old houses that are actually safe bets, which systems you absolutely need to inspect before closing. And the most common surprise is hiding behind those old walls. Plus, we'll reveal the single best construction era to target on your next deal, the sweet spot where you can add value with modern updates, but the original build quality still holds up.

1:10Henry Washington:What's up, everyone? I'm Dave Meyer, here with my co-host, Henry Washington. Today, we're answering questions from real investors in the BiggerPockets forums, and we're going to spend a lot of this episode talking about how to safely buy older houses. But our first question comes from an investor named Kyler in Birmingham. He says, hey, everyone, me and my fiance just got engaged. Congratulations, Kyler. And I've somehow convinced her to house hack for our first home in Oxford, Alabama. I don't know anything about Oxford, Alabama, but that sounds like it sounds like a feat. So congratulations on that, too.

1:48Henry Washington:He goes on to say, being in a smaller city, there's not a ton of residential multifamily properties in the area. Would it make sense to build a duplex as our first home utilizing an FHA construction loan? I can't find much information on people taking this approach instead of finding a preexisting home. I understand that the cost will be higher and there won't be any opportunities to add value through renovation, but I wasn't sure if those were big enough reasons to look into a different direction. I mean, this is a good question though, right? I mean, new construction has become pretty popular these days.

2:23Henry Washington:So Henry, what's your take? Don't do it. Sorry, Kyler. I guess don't do it is the simple answer here, but why? Yeah, here's in all seriousness, I think that if you had construction experience, or you're in a situation where you have the resources necessary to pull this off, like you've got a great contractor that has a proven track record, you've vetted them appropriately, you've got the funds and everything all lined up, and you've got the time horizon to wait for it to be finished, then potentially, yeah, that's a really good idea. because you're going to get the benefits of new construction and lower costs.

3:09But building isn't easy. It's something typically that investors start to take on after they've had some experience doing some regular real estate deals, some value add deals, once they've got some more skills under their belt. So does it mean you can't have one built? I mean, people have personal homes built all the time. So if you were going to build a new home and you hire a builder and they take care of it all for you and the numbers make sense, then, yeah, it might be a decent thing to do. But if it is something where you've got to go find the team, you've got to go get the loan and you've got to find the plans and and hire the structure, hire the engineers.

3:51And that's just a lot. It's quite an undertaking and you can make a lot of mistakes and it could not be as profitable or as easy as just going to buy something on the market.

4:00Henry Washington:Yeah, I'm with you. I think this idea of build to rent, which is essentially what he's talking about, build to rent combined with a house hack. Good idea. I mean, I think the numbers probably would make sense, but execution wise, it's difficult for a couple of reasons. First and foremost, if you already had to convince your fiance to house hack and she was maybe a little resistant to that, I'm just going to throw out there that managing a construction project that you've never done before might put some straight on your relationship. Just, I don't know you guys, but I'm just going to throw that out there that one could imagine that it might do that a little bit.

4:41Henry Washington:The second thing I would ask you, Kyler, is why not just somewhere else? Maybe you live in Oxford. You're passionate about this place. I just looked it up. It looks like a small town. But is there another place where you could buy a multifamily and it would be existing and it wouldn't be that hard? I say this one for everything Henry pointed out, the complexity of it. But the other thing I think a lot of people overlook is if there's not a lot of multifamily in this market and you build something that's unusual, you may have a really hard time renting it out. If everyone else in that market is used to renting single family homes because that's what's available in that market, you could come in with a new product and it can be beautiful, but it might not be in high demand just because people in this area want single family homes.

5:32Henry Washington:My guess is the reason there aren't multifamily homes in this area is because there's not demand for it. So I think you also have to just think about the product you're building and if it's actually applicable or an appropriate thing to be investing in in that market. So if I were you, I would either choose a different market or maybe don't go with a house hacking strategy, rent something and buy a investment property. There's a lot of great markets in Alabama to buy just regular old rental properties, for example. It looks like Oxford, I'm looking this up, is not that far from Birmingham. There's good rentals there.

6:12Henry Washington:Huntsville is a great market. I mean, you're not even that far from Atlanta, some parts of Georgia. There are places that you could invest in. So for your first deal, I would recommend doing that, even if that means giving up on house hacking, which obviously has a lot of benefits. All right. Our next question comes from an investor named Nicole. Now, Nicole asks on the BiggerPockets forum, I'm starting to look at some older properties pre-1960s in Columbus, Ohio. Previously, my buy box was post-1964, trying to avoid knob and tube wiring and other challenges with older homes. But that is becoming a barrier to buying, so I'm thinking about expanding my buy box and looking for any advice on things to be cautious about or questions to ask.

6:59Here's what I would look out for in older properties. It's, yes, obviously knob and tube wiring. So the same thing applies. I'm always looking at the big five. I'm looking at plumbing, electrical roofs, HVAC, and foundation. But these older properties, I think where they really can hurt somebody is foundation. Especially in the Midwest. Some of them have the old cinder block foundations. They're super wobbly. And sometimes even when you fix these foundations and you can spend 20, 30, 40, 50 grand to do it, the house still is sloped and wobbly. It's not like you can just completely remedy these things.

7:35So it's something you have to consider when owning in this asset class. And more so, even if you buy a property that's older and you fix the foundation problems, if it's still a little coonkity on the inside. Coonkity? What is coonkity? Like, you know, a little wobbly, a little wobbly, a little. Yeah.

7:55Henry Washington:Okay. Coonkity. You've got to go on. You may have to sell that property eventually. and trying to convince somebody else that even though you spent 20, 30 grand on fixing that foundation, it may be a hard sell. So the first thing I tell you to look out for is to always have a specialist, a foundation specialist, take a look at the foundation of that property and give you their fair assessment on how structurally sound they think it is and how long they think it's going to last. Or if it's not, what's it going to cost to fix it? Because foundation work is, I think the number one thing that's going to cause you a big pain in the butt.

8:31Next is probably plumbing issues with old pipes and make sure that you get a quote for what it's going to cost if you've got to replumb that entire house up to new plumbing standards. Because especially if it's an older property and it's a buy and hold, if you're planning on holding this for 5, 10, 15, 20 years, at some point, that falls on you to take care of, right?

8:58Henry Washington:Dude, I'm doing this right now, replumbing a whole house. I think I've been telling you this for nine months because it's been going on for nine months. And what's it costing you? 80 grand. Woo, that's a house. Yeah, well, for you. For me, yes. For me, the things to watch out for in older properties is always going to be plumbing and foundations. Electrical, yeah, everybody says watch out for an album too, but like electricals, you know, between five and 10 grand, you put new electrical in. It's not the end of the world on electrical. Roof is fine. But yeah, roof, 10, 15 grand, depending on how big the property is, not the end of the world.

9:30But plumbing and foundation, you can get up there into almost six figures and having to fix some of those problems. So you definitely want to have an understanding of what's going on with those things prior to you buying or closing on an older property.

9:46Henry Washington:I really like this question because I don't think there's a right answer. I think in the first eight years of my investing career, I didn't buy something that was after 1940. Everything I bought in Colorado was 1890s, 1920s, that kind of stuff, because that's what I could afford and those are the deals that I can do. So I feel like I've learned a lot about this. I would still buy older properties. I think what you need to think through, though, is how recently renovated the property has been when you're buying it. Because if it hasn't really been touched, if no one's done the work Henry was talking about of making sure the foundation is good, making sure the plumbing is up to date, you don't want to do that.

10:30Henry Washington:Like most people don't want to do that unless you have a lot of experience with this kind of thing. I even talked to James, our mutual friend, Flipper. He said that there's only a certain number of contractors he uses, and he has done thousands of deals for these older type homes because it is really specialized to be able to do this effectively. So I think the challenge here is that a lot of people look at these older homes and say, oh, that's a great value add opportunity. And there is, if you can execute it, and there are some things that I've been able to do successfully, but I will say everything costs more when you're doing these renovations than if you're, you know, you take out a tub all of a sudden, like literally this happens and you're like, oh, that's a drain I've never seen before.

11:16Henry Washington:Like I just like that you can't get a part. So you wind up having to replace the whole thing. The other thing I would say is that doing a lot of the value add that is most valuable, like redoing a layout is very, very difficult. And so So like, I think it's the kind of situation where you can buy an old home if the layout is good, if the plumbing has been upgraded, ideally electrical. But as Henry said, it's not crazy, but like ideally it's been updated. If all that's true and you're just doing like cosmetic or someone's done a great job and it's like a really cool old house that's been renovated, go for that.

11:51Henry Washington:Like that's fine. But I think it's the like, hey, this is cheap. I'm going to renovate it cheap. It's tough. Another thing to be cognizant of is your heat and air situation. Some of these old homes have boilers. Oh, yeah. And these things vary depending on what part of the country you're in. But if you've got to update that to modern heating and cooling, especially if it's a property that's never been ducted before, your price goes through the roof in terms of what it costs to put modern heat and air in there. If you have to do all new ducks and actually duck to house, instead of you spending five to eight grand, you spend 16 to 20 grand or more putting in HVAC and modernizing HVAC.

12:36So another thing to watch out for.

12:37Henry Washington:What is your sweet spot year? Like if you could pick a year for a house to be from, what would you pick? 70 to like 75. Yeah. Because the layouts are cool. They have big rooms. They might even have a sunken living room with one of those weird couches. Yeah, yeah, yeah. Built-in couches, yeah. Yeah, absolutely. I think it's the sweet spot because, yeah, you don't have the risk of knob and tube. 60s is good, but you still have some asbestos risk in the 60s. So, yeah, lead paint. If you get into the mid-70s, the lumber quality was better than it is today. That's fair. It's true. There's some really funny memes.

13:17Henry Washington:You can go look at the size of a 2x4 over time. Like it used to actually be two by four. Now it is far from that. But yeah, like a lot of the quality of the construction was really good back in the 70s. And I agree, you see a lot like mid-century kind of style homes. That layout is popular right now again. So I'd still try and find 1960s or more recent, but you might be able to find some gems in there in the older stock that has been upgraded. where someone bought it in the 80s, upgraded it a lot, and now most of the systems are 80s quality. Like that's a little different than something that truly is like a time capsule, hasn't been changed in a really long time.

14:05Henry Washington:All right, great question though, Nicole. Really interesting one, and I think a real predicament and thing to think about for anyone investing, especially in the Midwest and the Northeast. You see a lot of these old homes. It's an important thing to consider. We got to take a quick break, but we'll be back with more BiggerPockets community questions right after this. Stick with us. Summer bookings sound great until someone slips by the pool, gets hurt on your dock, or damages your property during a long holiday weekend. A lot of short-term rental investors don't realize their standard policy may leave gaps when it comes to short-term rental activity.

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17:51Henry Washington:Welcome back to the BiggerPockets podcast. Henry and I are here answering your question or BiggerPockets community questions about anything to do with real estate. By the way, we are answering these from the BiggerPockets forums. If you have questions about your own investing, go post them on the BiggerPockets forums. You can get dozens or hundreds of responses from experienced investors. There are three and a half million people on BiggerPockets.com answering these kinds of questions, and we might just pick one of your questions for these episodes. Our next question is from Allie in Houston, who has a question about renovation budgets.

18:26Henry Washington:She asks, for investors using hard money, private money, or renovation loans, how detailed does your rehab budget need to be? I've seen some lenders accept a pretty simple breakdown. For example, roof cost, HVAC costs, interior cost, and contingency. But others seem to want line item scope, including trades, assumptions, draw schedule logic, and proof that the numbers are realistic. For people who have done this a few times, what makes a rehab budget, quote unquote, lender ready in your experience? Uh-oh, Henry's giggling. No, it's a good question. It's a good question. What do you do? just write$50 ,000 on a piece of paper and hand it over.

19:05Yeah, I give them a napkin with like Cheeto dust on it. And then I write a number. In my experience, let me put it this way. I've done hundreds of deals. I've used the exact same template for a rehab budget to send to a lender every single time. And it's just - Across lenders for different lenders. different lenders. And it is a very simple, high level renovation budget breakdown. So I'll do a detailed scope. But when I send it to the lender, I roll it up to high level. And so I'm just going to read some of the line items that I have on one of my most recent renovation budgets. So I'm going to share my screen so you can see what it is that I submit to the bank.

19:49So I've been using the same template here. And it really is just the trade in one column and then the total cost for that trade on the other column. And I'd say it's a fair mix between enough detail so that the bank knows what I plan to do, but not so much detail that it's annoying for me to put it together. Does that make sense?

20:14Henry Washington:yeah you're prioritizing how annoying is this for you right absolutely like that absolutely yeah so you're thinking about it just so like the way your mind is working on this is these are the different vendors like trades that you're going to and paying to so you're not saying like oh i'm putting down x square feet of y product correct of flooring you're just like flooring six grand yeah so for me flowing sixth grand. That includes the tile I'll use, the LVP that I'll use. It includes the carpet that I'll use in the bedrooms. It's just all rolled up into one. Interior paint, that's just interior paint.

20:53If I was going to paint the kitchen cabinets, it would be in this same number, labor and materials, right? There's some individual items that I'll purchase in here, you know, toilets, appliances. Yeah, you get granular with some of it. Some of it gets a little granular, but for the most, I consider this high level because you can get a lot more detailed and behind the scenes if i were to unhide some of these columns you'll see like the detail behind it how many square feet of flooring or paint but i don't show that to them i just roll it up and show them so when i'm building the spreadsheet i'm doing it in detail and then

21:29Henry Washington:i'll roll it up to give to the bank well let me ask you this because you do far more flips than I can never dream of, but aren't you doing this anyway? Like, aren't you creating this budget when you're underwriting the deal? So like what additional work are you really doing here even to talk to the lender? Yeah, you are doing this work or you should be doing this work. Where this gets annoying for the investor is if you're shopping lenders, what they will do is a lot of them have their own templates for this that they want you to fill out. And it becomes very tedious and annoying to have to keep converting your spreadsheet into whatever versions they have.

22:13So I just use my own and I send that to them. And I tell them, if you have your own template, that's great. You can put this in your template, but I'm just going to do this one time. And I do it, like I said, I do it at the detailed level, but then I can roll it up because I have to do it anyway. So I'm not really spending any extra time to build this for a particular lender. it's something I have to build anyway. I just give them a simplified version.

22:36Henry Washington:And like, you've never, regardless of who you're talking to, what lenders you're talking to, fine. No one's pushing back on this. No one's ever pushed back and said, you must put this in our template. I have had people say, we want this in our template. And then I just say, you can absolutely put that in your own template. Yeah. Go for it. Have fun, do whatever you want. Have at it. I get that it's annoying to do it, but if you go to the level of detail Henry has done here, which doesn't seem onerous, right? It's not crazy. You're just going to give people a lot more confidence in you. So I don't see why you wouldn't.

23:14Henry Washington:I don't see like, quote unquote, just writing interiors 50 ,000 or doing what Henry's talking about is the difference of what, 30 minutes of work? Just do that and get the loan. Absolutely. Yes. It'll give lenders confidence. You're right. They're just going to do a gut check. And honestly, if I gave them this, and they came back to me questioning the details of it, that's not a lender I'm going to use because that's telling me that the rest of this process is going to be equally as annoying. The one thing I will say is if you're a newer investor, expect a higher degree of scrutiny and that's okay.